SECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

|X | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the quarterly
period ended September 30, 2003

or

| | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
| | -----------------------------------------------------------------------------------------

For the transition
period from ______ to ______

Commission File Number
0-12950

ALLIANCE PHARMACEUTICAL
CORP. (Exact name of Registrant as specified in its charter)

|                                  |                       
|--------------------------------- | ----------------------
|New York                          | 14-1644018            
|                                  |                       
|(State or other jurisdiction      | (I.R.S. Employer      
|of incorporation or organization) | Identification Number)
|6175 Lusk Boulevard              
|San Diego, California             | 92121                 
|                                  |                       
|(Address of principal             | Zip Code              
|executive offices)               
|Registrant's telephone number,   
|including area code:              | (858) 410-5200        
|                                  |                       

Indicate by a check whether the
registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.

Yes X        
No

As of November 12, 2003,
Registrant had 28,396,461 shares of its Common Stock, $.01 par value, outstanding.

---

# ALLIANCE PHARMACEUTICAL
CORP.

INDEX

|                                                               | Page No.
|-------------------------------------------------------------- | --------
|PART I - FINANCIAL INFORMATION                                 |         
|Item 1. Financial Statements                                  
|Unaudited Condensed Consolidated Balance Sheets                | 3       
|Unaudited Condensed Consolidated Statements of Operations      | 4       
|Unaudited Condensed Consolidated Statements of Cash Flows      | 5       
|Notes to Unaudited Condensed Consolidated Financial Statements | 6       
|Item 2. Management's Discussion and Analysis of               
|Financial Condition and Results of Operations                  | 12      
|Item 3. Controls And Procedures                                | 17      
|PART II - OTHER INFORMATION                                   
|Item 1. Legal Proceedings                                      | 18      
|Item 2. Changes in Securities                                  | 19      
|Item 3. Defaults Upon Senior Securities                        | 19      
|Item 4. Submission of Matters to a Vote of Security Holders    | 19      
|Item 5. Other Information                                      | 19      
|Item 6. Exhibits and Reports on Form 8-K                       | 19      

2

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# Part I Financial
Information:Item 1. Financial Statements

# ALLIANCE PHARMACEUTICAL
CORP.      UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

---

|                                                              
|--------------------------------------------------------------
|(Unaudited)                                                   
|Assets                                                        
|Current assets:                                               
|Cash and cash equivalents                                     
|Other current assets                                          
|                                                              
|Total current assets                                          
|Restricted cash                                               
|Other assets - net                                            
|                                                              
|                                                              
|                                                              
|Liabilities and Stockholders' Deficit                         
|Current liabilities:                                          
|Accounts payable                                              
|Accrued expenses                                              
|Short-term debt                                               
|                                                              
|Total current liabilities                                     
|Other liabilities                                             
|Stockholders' deficit:                                        
|Preferred stock - $.01 par value; 5,000,000 shares authorized;
|793,750 shares of Series F issued and outstanding at          
|September 30, 2003 and June 30, 2003                          
|Common stock - $.01 par value; 125,000,000 shares authorized; 
|27,978,461 and 27,973,961 shares issued and outstanding at    
|September 30, 2003 and June 30, 2003, respectively            
|Additional paid-in capital                                    
|Accumulated deficit                                           
|                                                              
|Total stockholders' deficit                                   
|                                                              
|                                                              
|                                                              

|Note: | The
balance sheet at June 30, 2003 has been derived from the audited financial statements at
that date but does not include              all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See Accompanying Notes to Unaudited
Condensed Consolidated Financial Statements

3

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# ALLIANCE PHARMACEUTICAL
CORP.      UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

---

|                                            
|--------------------------------------------
|                                            
|                                            
|Revenues:                                   
|License and research revenue                
|Operating expenses:                         
|Research and development                    
|General and administrative                  
|                                            
|                                            
|                                            
|Loss from operations                        
|Investment income                           
|Other income                                
|Interest expense                            
|Gain on disposition of asset                
|                                            
|Net income (loss)                           
|                                            
|Net income (loss) per common share, basic   
|                                            
|Net income (loss) per common share, diluted 
|                                            
|Weighted average shares outstanding, basic  
|                                            
|Weighted average shares outstanding, diluted
|                                            

See Accompanying Notes to Unaudited
Condensed Consolidated Financial Statements

4

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# ALLIANCE PHARMACEUTICAL
CORP.      UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

---

|                                                              
|--------------------------------------------------------------
|                                                              
|                                                              
|Operating activities:                                         
|Net income (loss)                                             
|Adjustments to reconcile net income (loss) to net cash used in
|operations:                                                   
|Depreciation and amortization                                 
|Expense associated with warrant issuance                      
|Gain on disposition of asset                                  
|Changes in operating assets and liabilities:                  
|Restricted cash and other assets                              
|Accounts payable and accrued expenses and other               
|                                                              
|Net cash used in operating activities                         
|                                                              
|Investing activities:                                         
|Property and equipment                                        
|Proceeds from disposition of asset                            
|                                                              
|Net cash provided by investing activities                     
|                                                              
|Financing activities:                                         
|Issuance of convertible preferred stock - net                 
|Proceeds from long-term debt                                  
|Proceeds from revolving line of credit                        
|Issuance of common stock                                      
|                                                              
|Net cash provided by financing activities                     
|                                                              
|Decrease in cash and cash equivalents                         
|Cash and cash equivalents at beginning of period              
|                                                              
|Cash and cash equivalents at end of period                    
|                                                              
|Supplemental disclosure of cash flow information:             
|Interest paid                                                 
|                                                              

See Accompanying Notes to Unaudited
Condensed Consolidated Financial Statements

5

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# ALLIANCE PHARMACEUTICAL
CORP.

# NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

---

# 1. ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

# Organization

Alliance
 Pharmaceutical  Corp.  and its  subsidiaries  (collectively,  the "Company" or
 "Alliance")  are engaged in identifying, designing, and developing novel medical
products.

# Liquidity and Basis of
Presentation

The
accompanying financial statements are prepared assuming the Company is a going concern.
The Company lacks sufficient working capital to fund its operations for the entire fiscal
year ending June 30, 2004. Therefore, substantial additional capital resources will be
required to fund the ongoing operations related to the Companys research,
development, manufacturing and business development activities. Management believes there
are a number of potential alternatives available to meet the continuing capital
requirements, such as public or private financings or collaborative agreements, and is
actively pursuing all the alternatives. In addition, the Company continues to reduce its
ongoing expenses and has significantly curtailed its operating plans. The quarterly
financial statements do not include any adjustment to reflect the possible future effects
on the recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

# Principles of
Consolidation

The
consolidated financial statements include the accounts of Alliance Pharmaceutical Corp.,
the accounts of its wholly-owned subsidiary Molecular Biosystems, Inc. (MBI)
from the acquisition date of December 29, 2000, its wholly-owned subsidiaries
Astral, Inc., MDV Technologies, Inc., Alliance Pharmaceutical GmbH, and its
majority-owned subsidiary Talco Pharmaceutical, Inc. All significant intercompany
accounts and transactions have been eliminated.

# Interim Condensed
Financial Statements

The
condensed consolidated balance sheet as of September 30, 2003, the condensed
consolidated statements of operations for the three months ended September 30, 2003
and 2002, and the condensed consolidated statements of cash flows for the three months
ended September 30, 2003 and 2002 are unaudited. In the opinion of management, such
unaudited financial statements include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of the results to be expected
for the full year. The financial statements should be read in conjunction with the Companys
consolidated financial statements and footnotes thereto included in the Companys
annual report on Form 10-K for the year ended June 30, 2003.

# Use of Estimates

The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and disclosures made in the accompanying notes to the
consolidated financial statements. Actual results could differ from those estimates.

6

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# Cash and Cash Equivalents

The
Company considers instruments purchased with an original maturity of three months or less
to be cash equivalents.

# Concentration of Credit
Risk

Cash
and cash equivalents are financial instruments that potentially subject the Company to
concentration of credit risk. The Company invests its excess cash primarily in U.S.
government securities and debt instruments of financial institutions and corporations
with strong credit ratings. The Company has established guidelines relative to
diversification and maturities to maintain safety and liquidity. These guidelines are
reviewed periodically and modified to take advantage of trends in yields and interest
rates. The Company has not experienced any material losses on its short-term investments.

# Revenue Recognition

Revenue
is generally recognized when all contractual obligations have been satisfied and
collection of the resulting receivable is reasonably assured.

Research
and Development Revenues Under Collaborative Agreements

Research
and development revenues under collaborative agreements are recognized as the related
expenses are incurred, up to contractual limits. Payments received under these agreements
that are related to future performance are deferred and recorded as revenue as they are
earned over the specified future performance period. Revenue related to nonrefundable,
upfront fees are recognized over the period of the contractual arrangements as
performance obligations related to the services to be provided have been satisfied.
Revenue related to milestones is recognized upon completion of the milestones
performance requirement. Revenue from product sales is recognized upon the transfer of
title, which is generally when products are shipped.

Licensing
and Royalty Revenues

Licensing
and royalty revenues for which no services are required to be performed in the future are
recognized immediately, if collectibility is reasonably assured.

# Research and Development
Expenses

Research
and development expenditures are charged to expense as incurred. Research and development
expenditures include the cost of salaries and benefits for clinical, scientific,
manufacturing, engineering and operations personnel, payments to outside researchers for
preclinical and clinical trials and other product development work, payments related to
facility lease and utility expenses, depreciation and amortization, patent costs, as well
as other expenditures.

# Computation of Earnings
Per Common Share

Basic
earnings per share was computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings per share for the
three months ended September 30, 2003 reflects the potential dilution that could occur if
net income were divided by the weighted average number of common shares, plus common
shares from the exercise of outstanding stock options and the conversion of preferred
stock and convertible debt where the effect of those securities is dilutive. All potential
dilutive common shares have been excluded from the calculation of diluted loss per share
for the three months ended September 30, 2002, as their inclusion would be anti-dilutive.
The computations for basic and diluted earnings per share are as follows:

7

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|                                      | Income/(Loss)
(Numerator) | Shares
(Denominator) | Income (Loss)
Per Share
|------------------------------------- | ------------------------- | -------------------- | -----------------------
|Three Months Ended September 30, 2003 |                           |                      |                        
|Basic earnings per share:             |                           |                     
|Net income                            |                           |                      | $                      
|Diluted earnings per share:           |                           |                     
|Dilutive stock options                |                           |                      |                        
|Series F preferred stock              |                           |                      |                        
|Convertible debentures                |                           |                      |                        
|                                      |                           |                      |                        
|Net income plus assumed conversions   |                           |                      | $                      
|                                      |                           |                      |                        
|Three Months Ended September 30, 2002 |                           |                      |                        
|Basic and diluted loss per share:     |                           |                      |                        
|Net loss                              |                           |                      | $                      
|                                      |                           |                      |                        

# Accounting for
StockBased Compensation

The
Company has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation and SFAS No. 148, an amendment to SFAS No. 123. In accordance with its
provisions, the Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans, and accordingly, no
compensation cost has been recognized for stock options during the three-month periods
ended September 30, 2003 and 2002. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date and amortized to expense
over their vesting period as prescribed by SFAS No. 123, the Companys net
income (loss) and net income (loss) per share would have been decreased (increased) to the
pro forma amounts indicated below for the three months ended September 30:

8

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|                                    
|------------------------------------
|Net income (loss)                   
|As reported                         
|Fair value of stock-based           
|employee compensation               
|                                    
|Pro forma                           
|                                    
|Net income (loss) per share, basic  
|As reported                         
|Pro forma                           
|Net income (loss) per share, diluted
|As reported                         
|Pro forma                           

The
impact of outstanding non-vested stock options granted prior to 1996 (the effective date
of SFAS 123) has been excluded from the pro forma calculations; accordingly, the pro forma
adjustments for the three-month periods ended September 30, 2003 and 2002 are not
indicative of future period pro forma adjustments if the calculation reflected all
applicable stock options. The fair value of options at date of grant was estimated using
the Black-Scholes option-pricing model with the following assumptions for both periods,
respectively: risk-free interest rate range of 3.25% to 6.5%; dividend yield of 0%;
volatility factor of 135%; and a weightedaverage expected term of 7 years. The
estimated weighted average fair value at grant date for the options granted during the
three-month periods of 2003 and 2002 was $0.16 and $0.28 per option, respectively.

# Comprehensive Income
(Loss)

SFAS
No. 130, Comprehensive Income requires unrealized gains and losses on the
Companys available-for-sale securities to be included in accumulated comprehensive
income (loss). During the three months ended September 30, 2003 and 2002, the total
comprehensive income (loss) was the same as the reported net income (loss).

# 2. SALE OF
Imagent® BUSINESS

On
June 18, 2003, Photogen Technologies, Inc. (Photogen) acquired certain assets
and assumed certain liabilities from Alliance for approximately $1.1 million in cash and
$3.5 million of Photogen common stock. During the period between 90 and 365 days after the
closing, Photogen is obligated to pay up to $3 million and deliver up to an aggregate of
1,985,522 shares of its common stock to certain creditors of Alliance. The amount of
consideration was determined through arms-length negotiation. Alliance recorded a gain
from sale of assets of $10.6 million during the year ended June 30, 2003 related to this
disposition of an asset. During the first fiscal quarter ended September 30, 2003,
Alliance recorded $1.9 million as a gain on the disposition of an asset as a result of
Photogen funding $262,000 of Alliances obligations and $1.6 million related to
settlement agreements entered into with creditors to reduce its obligations. In addition,
subsequent to the closing and through 2010, Photogen is obligated to pay Alliance further
consideration in the form of an earn-out based on Imagent revenue invoiced (subject
to certain reductions). The assets acquired by Photogen include all of Alliances
assets related to designing, developing, manufacturing, marketing, selling, licensing,
supporting and maintaining its Imagent product, an ultrasound contrast agent that
was approved by the Federal Food & Drug Administration (FDA) for marketing
in the United States in June 2002.

9

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The
amount of the earn-out will equal, for each year of the earn-out: (i) 7.5% of
Imagent revenue up to $20,000,000; (ii) 10% of Imagent revenue between
$20,000,000 and $30,000,000; (iii) 15% of Imagent revenue between $30,000,000; and
(iv) $40,000,000 and 20% of Imagent revenue above $40,000,000. The earn-out will be
reduced by amounts Photogen must pay pursuant to a license agreement with Schering
Aktiengesellschaft (Schering), net of payments they receive from Schering
under the license, and amounts of any indemnification claims Photogen has against
Alliance. The earn-out is subject to three additional offsets (which are to be applied in
the manner described in the Asset Purchase Agreement dated June 18, 2003 by and between
Alliance and Photogen (the Asset Purchase Agreement)) that entitle Photogen to
retain portions of the earn-out otherwise payable to Alliance:

| |  | Up
to approximately $1,600,000 for a fixed price offset, depending on the satisfaction of
certain conditions;
| | - | -------------------------------------------------------------------------------------------------------------

| |  | The
amount of any payments not committed to at closing Photogen makes after the closing to
Alliances creditors plus up to $1,000,000 of litigation expenses for certain patent
and other litigation; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Between
$4,000,000 and $5,000,000, which is the principal and accrued interest under Photogens
bridge loans to Alliance, depending on the satisfaction of certain conditions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 3. DEBT OBLIGATIONS

As
of June 18, 2003, the Company had received $5.8 million through the issuance of 8%
Convertible Secured Promissory Notes (the Notes) to various institutional
investors ($1.1 million) and Photogen ($4.7 million). The Notes were to mature in two
years from the date of issuance and were convertible into shares of Alliances common
stock at $0.35 per share. Alliances obligations under the Notes were secured by
certain of its assets, including all of its assets related to and its rights and interests
in Imagent and OxygentTM. In connection with the issuance of the
Notes, Alliance obtained the consent and waiver of anti-dilution rights from a majority of
the investors in the Companys October 2001 private placement. The Company also
obtained a similar consent and waiver from the holders of its 5% Convertible Debentures
(the 2004 Debentures) issued in 2000. As amended in February 2003, these
consents and waivers applied to any future issuance of notes by the Company on the same
terms as the Notes up to an aggregate of $5 million. The Company reduced the exercise
price on the warrants issued to the investors in the October 2001 private placement
from $3.38 to $0.35 per share, in accordance with the terms of the warrants. Alliance
reduced the conversion rate of the 2004 Debentures to $1.60 per share. Alliance also
agreed to issue warrants exercisable for an aggregate of 2,000,000 shares of common stock,
at an exercise price of $0.50 per share, to holders of its 2004 Debentures and granted
them a junior lien in the assets securing the Notes.

In
connection with the sale of the all of the assets related to designing, developing,
manufacturing, marketing, selling, licensing, supporting and maintaining Imagent
(collectively, the Imagent Business), the holders of the Notes
(excluding Photogen) and the holders of the 2004 Debentures agreed to accept a Payout
Amount (as defined in the Asset Purchase Agreement) in full satisfaction of
Alliances obligations and liabilities under such Notes and 2004 Debentures. To
induce the debt holders to enter into this agreement, Alliance and Photogen agreed to
deliver certain consideration to each other as described in the Asset Purchase Agreement
and summarized below. The outstanding balance of the Notes is $1.2 million, including
accrued interest, at September 30, 2003, and is classified in the current liabilities
section of the Consolidated Balance Sheet at September 30, 2003. The debt of $4.8 million,
including accrued interest, due to Photogen has been forgiven by Photogen and will be
repaid through a reduction of future Imagentroyalty payments, if any.

10

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Upon
delivery of the specified consideration, Alliances obligations under the Notes and
the 2004 Debentures shall be terminated and satisfied in full, and each of the loan
documents shall be deemed terminated and of no further effect. The obligation of Photogen
to the debt holders to deliver the consideration contemplated in the Asset Purchase
Agreement is a direct obligation of Photogen for the benefit of Alliance, fully
enforceable against Photogen irrespective of any actions, financial condition or other
circumstances relating to Photogen.

Alliances
specified consideration includes the issuance of an aggregate of 4,555,000 shares of
common stock, which were issued on June 19, 2003, to certain secured creditors; cash
payments funded by Photogen made at closing and to be made during the period between 90
and 365 days after the closing; and up to an aggregate of 14.84% interest of
Oxygent technology. If Photogen meets its obligation in funding the cash payments
to Alliances debt holders and creditors, Alliances short-term debt as recorded
at September 30, 2003, will be decreased by $12.1 million, along with reductions in
accounts payable and accrued expenses; however, the Company will value the interest in
Oxygent technology provided to certain creditors and record this value as deferred
royalty payments. As of September 30, 2003, the Company has recorded deferred royalty
payments of $750,000. Reductions to accounts payable and accrued expenses totaled $262,000
due to cash payments, which were funded by Photogen, to vendors and creditors and $1.6
million due to settlements with vendors and creditors during the first fiscal quarter
ended September 30, 2003. For settlement agreements with vendors and creditors that
provide for extended repayment terms, the Company will continue to record the entire
outstanding obligation, less payments to date, as the Company will not be released from
the full liability until it has repaid the entire settlement amount.  Upon repaying
the agreed-upon settlement amount, the Company will record a gain on settlement with
creditors.

In
July and August 2002, the Company entered into two separate loan and security
agreements, totaling $3 million, with an investment firm. In connection with these
transactions, the Company issued warrants to purchase up to 200,000 shares of common stock
at an exercise price of $3.38 per share. As part of the sale of the Imagent
Business, Photogen assumed Alliances obligation under these two loan and security
agreements.

In
November 2000, the Company sold $7 million of five-year 6% subordinated convertible
notes. The notes were convertible at any time after November 15, 2001, at each
investors option into shares of Alliance common stock at $78.60 per share (as
adjusted for the 1:5 reverse stock split), subject to certain antidilution provisions. In
connection with the transaction, Alliance placed $1.5 million in a restricted cash
account to be used to pay interest on the issued notes. The balance of the restricted cash
account of $532,000 was withdrawn by the investors during the quarter ended September 30,
2003. The outstanding principal balance of $6.5 million is due and payable and classified
in the current liabilities section of the Consolidated Balance Sheet at September 30,
2003. Photogen is responsible for the remaining balance of the liabilities; however, if
Photogen is unable to make the necessary payments, the convertible note holders have
recourse against the Company. Pursuant to the agreement, the investors will also receive
shares of Photogen common stock.

11

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In
August and September 2000, the Company sold $12 million of four-year 5% subordinated
convertible debentures to certain investors. In connection with the issuance of the Notes
described above, Alliance obtained the consent and waiver of antidilution rights from the
investors. On June 18, 2003, the balance outstanding on these debentures was $5.9 million.
Pursuant to a pay out agreement, the Company issued 1,250,000 shares of common stock and
paid $100,000 in cash to one of the investors. As of September 30, 2003, the outstanding
principal balance is $4.5 million and accrued interest is $677,000. The outstanding
principal balance and accrued interest are due and payable and classified in the current
liabilities section of the Consolidated Balance Sheet at September 30, 2003. Photogen is
responsible for the remaining balance of the liabilities; however, if Photogen is unable
to make the necessary payments, the convertible debenture holders have recourse against
the Company. Pursuant to the agreement, the investors will also receive shares of Photogen
common stock.

Pursuant
to a settlement agreement with a former landlord, the Company has a commitment to pay
$420,000 pursuant to a schedule included in the agreement. Alliance made its
first payment of $15,000 and has included the balance of the compromised amount in accrued
expenses in the Consolidated Balance Sheet as of September 30, 2003.

# Item 2.   Management's
Discussion and Analysis of Financial Condition and Results of Operations

Since
commencing operations in 1983, the Company has applied substantially all of its resources
to research and development programs and to clinical trials. The Company has incurred
operating losses since inception and, as of September 30, 2003, has an accumulated
deficit of $486.8 million. The Company expects to incur significant operating losses
over at least the next few years as the Company continues its research and product
development efforts and attempts to commercialize its products.

The
Companys revenues have come primarily from collaborations with corporate partners,
including research and development, milestone and royalty payments. The Companys
expenses have consisted primarily of research and development costs and administrative
costs. To date, the Companys revenues from the sale of products have not been
significant. The Company believes its future operating results may be subject to quarterly
fluctuations due to a variety of factors, including the timing of future collaborations
and the achievement of milestones under collaborative agreements, whether and when new
products are successfully developed and introduced by the Company or its competitors, and
market acceptance of products under development.

# Forward-Looking
Information

Except
for historical information, the statements made herein and elsewhere are forward-looking.
The Company wishes to caution readers that these statements are only predictions and that
the Companys business is subject to significant risks. The factors discussed herein
and other important factors, in some cases have affected, and in the future could affect,
the Companys actual results and could cause the Companys actual consolidated
results for 2004, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These risks include, but
are not limited to, the inability to obtain adequate financing for the Companys
development efforts; the inability to enter into collaborative relationships to further
develop and commercialize the Companys products; changes in any such relationships,
or the inability of any collaborative partner to adequately commercialize any of the
Companys products; the uncertainties associated with the lengthy regulatory approval
process, including uncertainties associated with FDA decisions and timing on product
development or approval; and the uncertainties associated with obtaining and enforcing
patents important to the Companys business; and possible competition from other
products. Furthermore, even if the Companys products appear promising at an early
stage of development, they may not reach the market for a number of important reasons.
Such reasons include, but are not limited to, the possibilities that the potential
products will be found ineffective during clinical trials; failure to receive necessary
regulatory approvals; difficulties in manufacturing on a large scale; failure to obtain
market acceptance; and the inability to commercialize because of proprietary rights of
third parties. The research, development, and market introduction of new products will
require the application of considerable technical and financial resources, while revenues
generated from such products, assuming they are developed successfully, may not be
realized for several years. Other material and unpredictable factors which could affect
operating results include, without limitation, the uncertainty of the timing of product
approvals and introductions and of sales growth; the ability to obtain necessary raw
materials at cost-effective prices or at all; the effect of possible technology and/or
other business acquisitions or transactions; and the increasing emphasis on controlling
healthcare costs and potential legislation or regulation of healthcare pricing. Further
cautionary information is contained in documents the Company files with the Securities and
Exchange Commission from time to time, including the latest Form 10-K.

12

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# Collaborative
Relationships

In
December 2002, Alliance entered into an exclusive license agreement with Mixture Sciences,
Inc. for Mixture Sciences to acquire all rights to a proprietary immunotherapy platform
technology developed by Astral, Inc. Mixture Sciences provided financing to support the
overhead and salaries of key employees involved with this technology for a secured
position in the technology subject to a royalty-bearing license. Alliance has certain
rights to repurchase the technology by paying Mixture Sciences a break-up fee. Alliance
has recorded the funds, totaling $285,000 at September 30, 2003, from Mixture Sciences as
a current liability.

In
May 2000, Alliance and Baxter Healthcare Corporation (Baxter) entered
into a joint venture for the manufacture, marketing, sales, and distribution of
Oxygent in the Europe and North America. The companies formed PFC Therapeutics
to oversee the further development, manufacture, marketing, sales, and distribution of
Oxygent. In connection with the transaction, PFC Therapeutics obtained an
exclusive license in the Baxter Territory to manufacture, market, sell, and distribute all
of the Companys injectable PFC emulsions capable of transporting oxygen in
therapeutic effective amounts in the bloodstream, including Oxygent. In May 2001,
because of a revised product development schedule, Baxter purchased certain
Oxygent-related equipment in lieu of purchasing the same amount of preferred stock.
In June 2003, in connection with the sale of the Imagent Business, Photogen assumed
Alliances equipment lease for Imagent-related items from Baxter. All
remaining equipment was returned to Baxter. Concurrent with this transaction, Alliance
acquired Baxters ownership interest in PFC Therapeutics. Alliance will pay Baxter a
royalty of 2% on gross sales of Oxygent by PFC Therapeutics (to an aggregate
maximum of $30,000,000 in royalty payments), following regulatory approval.

# Results of Operations

# Three
Months Ended September 30, 2003 as Compared with Three Months Ended September 30,
2002

13

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The
Companys revenue decreased to $17,000 for the three months ended September 30,
2003, compared to $21,000 for the three months ended September 30, 2002. This
decrease is attributable to less royalty revenue being earned by the Company during the
quarter.

Research
and development expenses decreased to $175,000 for the three months ended
September 30, 2003, compared to $6.2 million for the three months ended
September 30, 2002. The decrease in expenses was primarily due to the downsizing,
consolidation of facilities and no manufacturing, all of which are connected with the sale
of the Imagent Business, as well as to decreases related to the Companys
other research and development activities.

General
and administrative expenses decreased to $127,000 for the three months ended
September 30, 2003, compared to $2.9 million for the three months ended
September 30, 2002. The decrease in general and administrative expenses was primarily
due to a $1.1 million decrease in professional fees related to marketing activities,
as well as to decreases in other expenses due to the downsizing and consolidation of
facilities connected with the sale of the Imagent Business.

Investment
income was $4,000 for the three months ended September 30, 2003, compared to $32,000
for the three months ended September 30, 2002. The decrease was primarily a result of
lower average cash balances.

Other
income was $72,000 for the three months ended September 30, 2003, which is composed
of proceeds from insurance dividends and distributions. Other income for the three months
ended September 30, 2002 of $329,000 was primarily a result of recorded proceeds from the
settlement of a lawsuit.

Also
recorded as other income for the three months ended September 30, 2003, was a gain of $1.9
million on the disposition of assets resulting from the recording of payments (totaling
$262,000) from Photogen to fund Alliances obligations and settlements (totaling $1.6
million) with various vendors and creditors during the quarter in connection with the
Imagent Business sale transaction. For settlement agreements with vendors and
creditors that provide for extended repayment terms, the Company has recorded the entire
outstanding obligation less payments to date as the Company will not be released from the
full liability until completing the repayment terms. Upon repaying the agreed-upon
settlement amount, the Company will reduce the outstanding obligation to zero and will
record a gain on settlement with creditors.

Interest
expense was $78,000 for the three months ended September 30, 2003, compared to
$763,000 for the three months ended September 30, 2002. The decrease was theresult of debt settlements connected with the sale of the Imagent Business.

Alliance
expects to continue to incur substantial expenses associated with its research and
development programs. Operating losses may fluctuate from quarter to quarter as a result
of differences in the timing of revenues earned and expenses incurred and such
fluctuations may be substantial. The Companys historical results are not
necessarily indicative of future results.

# Liquidity and Capital
Resources

Through
September 2003, the Company financed its activities primarily from public and private
sales of equity, debt issuance and funding from collaborations with corporate partners.

14

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On
June 18, 2003, Photogen acquired the Imagent Business and assumed certain
liabilities from Alliance for approximately $1.1 million in cash and $3.5 million of
Photogen common stock. During the period between 90 and 365 days after the closing,
Photogen is obligated to pay up to $3 million and deliver up to an aggregate of 1,985,522
shares of its common stock to certain creditors. The amount of consideration was
determined through arms-length negotiation. In addition, subsequent to the closing and
through 2010, Photogen is obligated to pay Alliance further consideration in the form of
an earn-out based on Imagent revenue invoiced (subject to certain reductions). See
Note 2 to the Unaudited Condensed Consolidated Financial Statements.

As
part of Photogens purchase of the Imagent Business, Photogen assumed certain
debt obligations that Alliance entered into in July and August 2002, which included two
separate loan and security agreements that totaled $3 million with an investment firm
at an effective 100% annualized interest rate. Photogen assumed a total of $3.8 million
plus unpaid accrued interest.

The
rights Alliance was entitled to under the Schering License Agreement were transferred to
Photogen at the consummation of its acquisition of the Imagent Business. Photogen
also assumed a marketing agreement and line of credit totaling $2.5 million in connection
with its acquisition of the Imagent Business.

As
of June 18, 2003, the Company had received $5.8 million through the issuance of the
Notes to various institutional investors and Photogen. In connection with the sale of the
Imagent Business, the holders of the Notes (excluding Photogen) and the holders of
the 2004 Debentures agreed to accept a Payout Amount (as defined in the Asset Purchase
Agreement) in full satisfaction of Alliances obligations and liabilities under such
Notes and 2004 Debentures. To induce the debt holders to enter into this agreement,
Alliance and Photogen agreed to deliver certain consideration to each other as described
in the Asset Purchase Agreement and as summarized below. Upon delivery of the specified
consideration, Alliances obligations shall be terminated and satisfied in full, and
each of the loan documents shall be deemed terminated and of no further effect. It is
understood that the obligation of Photogen to the debt holders to deliver the
consideration contemplated in the Asset Purchase Agreement is a direct obligation of
Photogen for the benefit of Alliance, fully enforceable against Photogen irrespective of
any actions, financial condition or other circumstances relating to Photogen hereafter.
The outstanding principal balance on the Notes of $1.1 million and accrued interest of
$124,000 are due and payable and classified as short-term debt in the Consolidated Balance
Sheet at September 30, 2003. Pursuant to the agreement, the investors will also receive
shares of Photogen common stock.

In
November 2000, the Company sold $7 million of five-year 6% subordinated convertible
notes to certain investors. In connection with the transaction, Alliance placed
$1.5 million in a restricted cash account to be used to pay interest on the issued
notes. The balance of the restricted cash account of $532,000 was withdrawn by the
investors during the quarter ended September 30, 2003. The outstanding principal balance
of $6.5 million is due and payable and classified as short-term debt in the Consolidated
Balance Sheet at September 30, 2003. Pursuant to the agreement, the investors will also
receive shares of Photogen common stock.

In
August and September 2000, the Company sold $12 million of four-year 5% subordinated
convertible debentures to certain investors. On June 18, 2003, the balance
outstanding on these debentures was $5.9 million. Pursuant to the Pay Out agreement, the
Company issued 1,250,000 shares of common stock and paid $100,000 in cash to one of the
investors. The outstanding principal balance of $4.5 million and accrued interest are due
and payable and classified as short-term debt in the Consolidated Balance Sheet at
September 30, 2003. Pursuant to the agreement, the investors will also receive shares of
Photogen common stock.

15

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On
October 18, 2002, Alliances common stock was delisted from the Nasdaq National
Market for failure to meet the continued listing requirements. The Companys common
stock in now trading on the Over-the-Counter Bulletin Board under the symbol ALLP.OB.

The
Company had a net working deficit of $18.0 million at September 30, 2003, compared to
$20.9 million at June 30, 2003. The Companys cash and cash equivalents
decreased to $373,000 at September 30, 2003, from $763,000 at
June 30, 2003. The decrease resulted primarily from net cash used in operations
of $653,000, partially offset by cash received from Photogen of $262,000 for payment to
creditors in connection with the sale of the Imagent Business. The Companys
operations to date have consumed substantial amounts of cash and are expected to continue
to do so for the foreseeable future.

If
the Company is successful in raising additional financing, the Company expects to incur
substantial expenditures associated with product development. The Company may seek
additional collaborative research and development relationships with suitable corporate
partners for its products. There can be no assurance that such relationships, if any, will
successfully reduce the Companys funding requirements. Additional equity or debt
financing may be required, and there can be no assurance that such financing will be
available on reasonable terms, if at all. Because adequate funds were not available, the
Company has delayed its Oxygent development efforts and it has delayed, scaled
back, and eliminated one or more of its other product development programs, and it may be
required to obtain funds through arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies, product
candidates, or products that the Company would not otherwise relinquish.

The
Company lacks sufficient working capital to fund operations for the entire fiscal year
ending June 30, 2004. Therefore, substantial additional capital resources will be
required to fund the ongoing operations related to the Companys research,
development, and business development activities. The report of the Companys
independent auditors on the Companys fiscal 2003 financial statements includes a
paragraph that notes that the Companys financial condition raises substantial doubt
about its ability to continue as a going concern. Management believes there are a number
of potential alternatives available to meet the continuing capital requirements such as
public or private financings or collaborative agreements. Under the Asset Purchase
Agreement of the sale of the Imagent Business, the following debt was either
assumed by Photogen or settled through Pay Out agreements: $5.5 million of secured debt,
$2.5 million drawn on a line of credit, a $2.4 million capital lease, $2.5 million in
accounts payable and accrued expenses, and $12.1 million in secured convertible debt
(which is still included in liabilities as of September 30, 2003). Also, as part of the
agreement, the Photogen portion of the 8% convertible debt of $4.8 million has been
forgiven and will be repaid by a reduction of future Imagent royalty payments, if
any. See Note 1 to the Unaudited Condensed Consolidated Financial Statements.

The
Company is taking continuing actions to reduce its ongoing expenses. If adequate funds are
not available, the Company will be required to significantly curtail its plans and may
have to sell or license out significant portions of the Companys remaining
technologies or potential products. The quarterly 2004 financial statements do not include
any adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amount and classification of liabilities that may result
from the outcome of this uncertainty.

The
Companys future capital requirements will depend on many factors, including, but not
limited to, continued scientific progress in its research and development programs,
progress with preclinical testing and clinical trials, the time and cost involved in
obtaining regulatory approvals, patent costs, competing technological and market
developments, changes in collaborative relationships, and the ability of the Company to
establish additional collaborative relationships.

16

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# Critical Accounting
Policies

We
prepare our financial statements in conformity with generally accepted accounting
principles in the United States of America. As such, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable, based upon the
information available to us. These estimates and assumptions affect the reported balances
and amounts within our financial statements and supporting notes thereto. The significant
accounting policies, which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results, include the following:

Basis
of Presentation

The
accompanying financial statements have been prepared assuming the Company is a going
concern. The Company lacks sufficient working capital to fund operations for the entire
fiscal year ending June 30, 2004. The fiscal 2004 financial statements do not include any
adjustment to reflect the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from this
uncertainty.

Revenue
Recognition

Revenue
is generally recognized when all contracted obligations have been satisfied and collection
of the resulting receivables has occurred or is reasonably assured. Licensing and royalty
agreements where we have no future obligations include the Amended Optison Product Rights
Agreement dated as of August 6, 2001 and the Supplemental Agreement with Inhale
Therapeutic Systems, Inc. dated as of May 15, 2002.

# Item 3.  Controls And
Procedures

(a)       
          Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer
          and Chief Financial Officer have evaluated the effectiveness of our disclosure
          controls and procedures (as such term is defined in Rules 13a-15 and 15d-15
          under the Securities Exchange Act of 1934, as amended (the Exchange
          Act)) as of the end of the period covered by this quarterly report (the
          Evaluation Date). Based on such evaluation, such officers have
          concluded that, as of the Evaluation Date, our disclosure controls and
          procedures are effective in alerting them on a timely basis to material
          information relating to our Company (including our consolidated subsidiaries)
          required to be included in our reports filed or submitted under the Exchange
          Act.

(b)       
          Changes in Internal Controls over Financial Reporting. During the most recent
          fiscal quarter, there have not been any significant changes in our internal
          controls over financial reporting or in other factors that have materially
          affected, or are reasonably likely to materially affect, our internal controls
          over financial reporting.

17

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# Part II  Other
Information:

# Item 1.  Legal Proceedings

In
September 2003, Mt. Sinai School of Medicine of New York University sued Alliance in a New
York state court for alleged breach of two license and research agreements dating back to
1987 and 2001. The suit alleges that Alliance breached both the 1987 and 2001 agreements
and demands $326,502.95 in damages plus interest. The suit also seeks a declaratory
judgment that both the 1987 and 2001 agreements are void and of no effect. Alliance
believes the suit lacks merit and plans a vigorous defense of its rights under both
agreements; however there can be no assurances that Alliance will ultimately prevail or
that the outcome will not have a material adverse effect on Companys future
financial position or results of operations.

On
June 13, 2003, Alliance and Photogen jointly brought a patent infringement action against
Amersham Health Inc., Amersham Health AS and Amersham Health plc (collectively,
Amersham) in the United States District Court for the District of New Jersey.
The lawsuit alleges that through the sale of Amershams OPTISON product, Amersham and
its related entities infringe on seven patents acquired by Photogen through its purchase
of the Imagent Business. Alliance and Photogen are seeking damages and injunctive
relief against Amersham. Amersham brought counterclaims against Alliance and
Alliances subsidiary MBI asserting breach of contract claims, breach of good faith
and fair dealing, and tortious interference with contractual relations against Alliance
and MBI. Alliance and MBI believe that Amershams counterclaims are completely
without merit; however there can be no assurances that Alliance and MBI will ultimately
prevail or that the outcome will not have a material adverse effect on Companys
future financial position or results of operations.

On
July 2, 2003, Hub Properties Trust (Hub) filed a lawsuit against Alliance,
Immune Complex Corporation, Immune Complex, LLC (collectively Immune Complex),
and Vaccine Research Institute of San Diego (Vaccine). Hub alleges that the
defendants are liable for slightly less than $3.5 million of damages Hub suffered, because
Hub was unable to lease two properties due to defendants failure to timely
deactivate the radiological materials licenses on the properties. Alliance was the primary
tenant, Immune Complex was Alliances subtenant, and Vaccine was Immune
Complexs sub-subtenant. Immune Complex tendered its defense to Alliance. Alliance
did not accept the tender of defense. On August 21, 2003, Immune Complex filed its
cross-complaint for indemnity against Alliance. Now that the pleading stage is near
completion, the onset of discovery should begin shortly. Alliance will continue to
vigorously defend against Hubs claims.

On
February 23, 2001, a lawsuit was filed by two former shareholders of MBI purportedly on
behalf of themselves and others against the Company and certain of its officers. On March
1, 2001 and March 19, 2001, two additional similar lawsuits were filed by other former
shareholders of MBI. The lawsuits, filed in the U.S. District Court for the Southern
District of New York, allege that the Companys registration statement filed in
connection with the acquisition of MBI contains misrepresentations and omissions of
material facts in violation of certain federal securities laws. In May 2001, the actions
were consolidated. The plaintiffs are seeking rescission or compensatory damages, payment
of fees and expenses, and further relief. In January 2002, the plaintiffs filed a second
amended complaint adding an additional securities claim against the Company and the named
officers. The Company and its officers have filed a motion for summary judgment seeking
dismissal of the action, but the Court has not yet decided the motion. In
August 2001, another purported class action alleging substantially identical
allegations was filed in the U.S. District Court for the Southern District of California.
The plaintiffs in that action dismissed the action without prejudice in September 2001.
The Company believes that the lawsuits are completely without merit; however, there can be
no assurances that the Company will ultimately prevail or that the outcome will not have a
material adverse effect on Companys future financial position or results of
operations.

18

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In
December 2001, a lawsuit was filed against MBI in the U.S. District Court for the Northern
District of Illinois. The plaintiff in the action alleges that MBI breached a license
agreement and seeks an accounting, damages, a declaratory judgment terminating the license
agreement, and payment of fees and expenses. The Company believes that the lawsuit is
completely without merit; however, there can be no assurances that MBI will ultimately
prevail or that the outcome will not have a material adverse effect on Companys
future financial position or results of operations.

# Item 2. Changes in
Securities

None.

# Item 3. Defaults Upon
Senior Securities

None.

# Item 4.  Submission of
Matters to a Vote of Security Holders

None.

# Item 5. Other Information

None.

# Item 6. Exhibits and
Reports on Form 8-K

|(a) | Exhibits
|--- | --------

| | 31.1 | Chief
Executive Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------------------------------

| | 31.2 | Chief
Accounting Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
| | ---- | -------------------------------------------------------------------------------------------------

| | 32. | Chief
Executive and Chief Accounting Officers' Certificate Pursuant to Section 906 of the
                   Sarbanes-Oxley Act of 2002.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

|(b) | Reports
on Form 8-K
|--- | -------------------

| | None
| | ----

19

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SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

| | ALLIANCE PHARMACEUTICAL CORP.(Registrant)/s/  DUANE J. ROTHDuane J. RothChairman, CEO, and Chief Financial Officer
| | ------------------------------------------------------------------------------------------------------------------

Date: November 19, 2003

20